FOREX ROBOTS AND TRADING STRATEGIES

Why forex robots fail?

Put your seat belts and stay with me, this is going to be an interesting article because it might answer one of your big questions: why my best commercial forex robot is falling like a rock in spite of great backtests, Monte Carlo and Walk Forward analysis? I put all my trust and money in it and now it goes down. Damn with those analysis, they all are nothing but scam and empty words! Or is it? People are emotional beings driven by fear and greed. They always want to blame someone for their failure, lack of logic, discipline and knowledge and when there is no one around they blame God or Satan. When I was a kid I used to ignore my fathers advice who told me not to play football with older boys. Of course I did exactly the opposite, those boys took my ball, slapped me then  run away laughing  leaving me in one of the most deepest despair a 9 year old child can bear. My father didnt say a word when I asked him to run after them in order to get back my beloved ball. At that time I blamed him but I learned my lesson. Never get into something you cant handle based only on pure hopes and expectations. Before going into further details, let me remind you a few things:

1. Dont invest what you cant afford to lose, this way youll always be relaxed during drawdown periods. My monthly wage is $5,000, I dont invest more than $500/month. Those are my spare money. Forex is a risky business, only 5% of traders are making money and most of them are psychopaths.

2. Dont fall for hypes. Dont buy anything without a proper analysis but once you buy something, make sure you take the full responsibility.

3. Dont buy something based on faith, hopes and expectations. Leave those for church and rely on logic only when you trade. I read once that during the winter of 1884 a group of people sold everything they have just because their religious leader said that Jesus will surely come that night. Guess what? He didnt come, they were left penniless but there were still waiting for Jesus! Dont do the same, you can still wait for Jesus in the comfort of your house

4. Dont buy forex robots unless you know exactly how they work, the strategy must be fully transparent! Less rules, the better! More rules = the robot is curve fitted and will probably fail in real live trading.

Now, lets perform an analysis on one of my private bots, this one is called DayPivots because it trades only near support and resistance lines and have only 3 available parameters. Its one of the simplest and effective strategy I can think of.

Here is 13 years backtest:

DayPivots backtests

Maximal drawdown: 1053 pips

Total profit: 20,400 pips

Drawdown length: 393 days

Ok, so I have to be prepared to bear at least 393 days without profit and see my account losing more than 1053 pips. I can do that, but how reliable this strategy is? Does it work without crashing without any optimization on a highly correlated pair? Lets try it on USDCHF using exactly the same parameters I used on EURUSD.

DayPivots USDCHF

It survives but it doesnt look good. Ok, maybe I have to choose another set of parameters. Please remember that backtests represents the best of all possible worlds! Which means, it will get worse in real live trading.

Is it curve fitted? Yes, it is! Because I have chosen the best outcome after I optimized it from 2000 to 2013. In order to avoid that I have to choose a time period in which the market changed many times, choose the best performing parameters then test it against other periods. If it does well, then the strategy is sound enough to be used, if not, the strategy should be trashed in spite of good results.

Here are some random parameters from 2006 to 2010. Please note this is not the best outcome, its among one of the worst!

DayPivots 2006-2010

Well, doesnt look too pretty but it survives. Lets see how those settings are doing over a much larger unseen period, like 2000-2013.

Wow, it does pretty well over 13 years using parameters resulted from 4 years optimization, the drawdown is the same, profits are equally distributed, this has a great potential! It may suffer quite a drawdown over the years but at least I know almost for sure I can rely on this strategy. Keeping the same parameters, lets see how it behaves on USDCHF over 13 years. Does it survive?